Warning: China's plastics industry will flood the Asian market in about seven years, just as its 400 million-tonne steel industry has done in the past two years.
Consequence: Marginal players in Southeast Asia will be unable to compete with Chinese products.
Solution: Upgrade, innovate, adopt technology, form strategic alliances with global heavyweights and build niche markets.
Speakers from Southeast Asia's plastics community set forth these predictions and conclusions at Flexpo 2007, held Oct. 17-19 in Bangkok. The event focused on adopting new technologies that hold potential for the Southeast Asian plastics industry.
But will the region heed the call for ``stronger willpower and determination'' in changing the landscape among plastic manufacturers in Southeast Asia?
Currently almost all Southeast Asian industries operate in a ``comfort zone'' with significant profit margins, and plastics companies there enjoy 6-8 percent growth a year - as do plastics companies in most of Asia. But in China the plastics industry is ramping up capacity, supported by an incomparable growth rate of 12-18 percent a year.
A lesson learned
China's steel industry boasts a production capacity of between 400 million and 420 million metric tons a year, and will export as much 100 million metric tons of that this year, mostly in the form of finished or semifinished products, to Southeast Asian markets.
For the past two years, China has been the largest net exporter of steel into Southeast Asia, and its market now dictates steel prices in eastern Asia.
Nearly all steel traders in Southeast Asian now trade in cheaper Chinese-made products, especially for the billet. But since the start of 2007, China has been under pressure of the World Trade Organization to correct its trade imbalances, especially export surpluses to Europe and the United States. In response, the Beijing-based government has reviewed China's export tax structure, eliminated its export tax rebate on semifinished steel products and imposed export taxes, which on some products are as high as 15 percent. All this has left Southeast Asian steel rerollers, which use billets to produce wire-rods and bars, out in the cold.
With booming Asian construction markets and a limited supply of Chinese billets, prices in the marketplace are just not making sense, some steel industry observers have said.
Billet prices in China averaged $600-$610 per tonne, free on board, as September drew to a close, compared with Southeast Asian prices of $580 per tonne - in some cases on a cost, insurance and freight basis.
Rerolling plants in Indonesia, Vietnam and the Philippines have been forced to cut production, with some reporting output has dropped to below 40 percent of capacity. Top steel officials say they fear plant shutdowns.
Plastics industry experts at Flexpo said that 2014 will be a critical year for plastics in Asia.
The eventual result in the buildup of any business is excess capacity, and China's plastics industry will be no exception, the speakers said. The country's plastics manufacturers are expected to reach self-sufficiency in seven years, at which time those firms will focus more aggressively on exports, they warned.
When China begins to push its own plastics products into the markets of its smaller neighbors, especially into Southeast Asia, with a total population of around 550 million, there will be fallout for the region's countries, some of which have flourished on exports to China.
The good times of exporting to China are coming to an end, said Chakramon Phasukavanich, permanent secretary at Thailand's Ministry of Industry.
``We must brace ourselves to face the next downturn,'' he said Oct. 17 in his opening remarks at Flexpo in Bangkok. To do that, Southeast Asian companies need to develop strategies and innovations, he said.
His remarks underlined official concern about the future not only of Thailand's plastics industry but of the entire region.
Nearly all of Southeast Asia's plastics companies belong to the private sector, since developing Asian economies are focused on privatization as they seek freer trade. State-supported investments are declining, with governments committing less and less to industrial development, except for providing infrastructure.
Phasukavanich and other industry experts at Flexpo called for major change, saying the time is right for regional collaboration and cooperation. However, they said, those changes must be driven by the private sector. He pointed out that the multilateral 11-member Association of Southeast Asian Nations, which promotes macroeconomic cooperation, no longer favors regional industrial cooperation.
ASEAN has refocused on encouraging individual member countries to work on developing their own industries, he said.
Joint capital-intensive projects such as the ASEAN-sponsored fertilizer plant - developed by founding members Indonesia, Malaysia, Singapore, Thailand and the Philippines - are no longer viable, according to ASEAN's top planners. And they recently rejected a motion to revive talks about a long-discussed ASEAN steel complex.
Industry consultant Balaji Singh, president of Houston-based Chemical Market Resources Inc., said he believes the Asian plastics industry should move quickly to get ahead of competition from China.
There are strategic opportunities for research and development ventures with international groups, he said. He noted that a growing number of Western companies are locating R&D centers in India and that Southeast Asian industries should work at providing good bases for such setups.
Other options for countries in the region include accelerating the development of agriculture-based alternative fuels, which can be funneled into feedstocks for the regional plastics industries.
Thailand, with its huge food production base, already is working on a number of such initiatives and could become a major alternative-fuel producer, Singh said.
Indonesia, Malaysia and Vietnam are seeing big investments in palm oil and jatrophra plantations for developing alternative-fuel sources. Smaller investments for such plantations are going into Myanmar and Cambodia as well, but because of foreign involvement in those efforts, there are legal problems with land rights.
Thailand already is considering cassava, sugar and cornstarch in developing alternative fuels, according to Somsak Borrisuttanakul, chairman of the plastics group of the Federation of Thai Industries.
``We are looking for know-how in this area,'' he said.